Venture-backed DNA testing firm loses round in court

Despite receiving $7.5 million from a venture capitalist looking for fast growth, Strand Diagnostics LLC is actually shrinking because it can’t get its most important customer—the federal Medicare program—to pay for Strand’s medical tests.

Those tests, called Know Error, use DNA analysis to make sure a tissue sample that has been declared cancerous does, indeed, belong to the patient doctors think it does. Strand claims its test increases diagnostic accuracy before patients undergo expensive surgeries or take potentially harmful drugs.

Strand lost a key court battle on July 30 when Larry McKinney, a federal judge in Indianapolis, granted summary judgment in favor of the Medicare program, which has refused to reimburse Strand for its test since 2012. Medicare says the test merely identifies mistakes doctors and lab technicians should have caught on their own.

Strand has two other cases pending before McKinney and is considering an appeal of his July 30 ruling, said CEO Ted Schenberg. If Strand loses those cases, it has nearly 100 others lined up that it could use to file to challenge Medicare's conclusions.

“We believe that the cases were wrongly decided, no doubt about that,” Schenberg said. “We’re looking at all options, including the option to appeal.”

But in the meantime, Strand is trimming its sails. The company laid off about 10 people earlier this year—mostly sales representatives—in a deliberate attempt to not grow its revenue. The company still employs a staff of 40 at its headquarters in the AmeriPlex industrial park across Interstate 70 from Indianapolis International Airport.

The company booked $14 million in sales last year but about 30 percent of that was unpaid by Medicare.

Strand’s test volume had been growing 40 percent each year until last year. And even now, Strand is doing more work than ever for law enforcement agencies, where its tests help match crime-scene samples to suspects.

The company has recently won contracts with law enforcement agencies in Philadelphia, Phoenix and Tucson, Schenberg said.

In 2012, Strand received a boost from California-based NantWorks LLC, which committed up to $30 million over three years to fund Strand’s growth. But NantWorks only invested $7.5 million in Strand; a year after Medicare stopped paying, it decided not to exercise its options to put in the rest of the money it had committed.

With Medicare patients accounting for three out of every 10 patients Strand tests, Schenberg said, the company can't keep growing when that much of its business produces no revenue.

“In order to keep testing Medicare at no charge, it’s at the expense of growth,” Schenberg said. “It’s a nice profitable little business, but it could be a huge business.”

Since Medicare stopped paying in September 2012, Strand has tested Medicare patients nearly 16,000 times, Schenberg said. He added that those tests have halted more than 200 medical procedures that were going to be performed on the wrong patients.

Schenberg calculates those procedures would have cost Medicare $10 million. But at just $292 per test, Strand’s Know Error system would have cost less than $5 million for all the Medicare patients tested.

Medicare’s leaders say Strand is trying to get paid for something that doesn’t actually diagnose or treat any medical condition—which is the only procedure it has authority from Congress to reimburse. Strand’s test is called a DSPA, which stands for DNA Specimen Provenance Assay.

“We conclude that while DSPA testing is very useful as a tool for avoiding error and misidentification of a patient with cancer, these tests are not a Medicare-covered service, as they are not used directly for the diagnosis of treatment of an illness,” stated the Medicare Appeals Counsel in one of its rulings on Strand’s test.

If Strand can’t get a court to overturn that decision, Schenberg’s next hope is that Medicare itself might provide relief—indirectly. One of the contractors for Medicare, South Carolina-based Palmetto GBA, has been talking about requiring labs that run tests for “biomarkers”—which are proteins in body fluids that indicate the presence of a disease—to ensure the purity of their samples.

If that rule goes forward, those labs might need a test like Strand’s to comply.

“In the next 18 months,” Schenberg said, “we may see another revenue source.”